As Monti engaged in the final day of talks on forming a
government, the yield on Italy’s 10-year bond jumped to 7.06
percent at 1:10 p.m. Rome time, above the 7 percent threshold
that prompted Greece, Ireland and Portugal to seek EU bailouts.

Monti, a former European Union competition commissioner,
struggled yesterday to get political parties to agree to take
part in his so-called technical Cabinet. A government lacking
political representation may find it hard to muster support from
parliament to pass unpopular laws.

“My commitment is aimed at making sure that politics can
transform this difficult moment in a real opportunity for the
nation,” Monti told a news conference in Rome yesterday. “The
key thing is” to have the support of the parties, “without
which I wouldn’t even take on this task, regardless of the
physical presence” of politicians in the Cabinet, he said.

Monti held talks today with the leaders of the country’s
two biggest parties, former Prime Minister Silvio Berlusconi’s
People of Liberty and the Democratic Party, with neither
indicating support for politicians in the government.

“Technical Character”

Speaking after the talks, Democratic Party leader Pier Luigi Bersani said he supported a Monti government with “a
strong technical character.” Angelino Alfano, head of the PDL,
said Monti’s bid to form a new government is “poised for
success” and that implementing the austerity measures the
Berlusconi government pledged to the EU “represent the
cornerstone” of our support for Monti’s administration.

“A government without any parliamentarians in it will have
problems,” Massimo D’Alema, a former premier and member of the
opposition Democratic Party, said in an interview last night on
state-run Rai3 television. ‘This will require that we give him
some help in parliament.”

Antonio Di Pietro, head of the Italian Values party, told
reporters yesterday after speaking with Monti that he was
“unsure” whether the premier-in-waiting would end up agreeing
to form a new government. Monti will likely announce his
decision and possible Cabinet tomorrow, newspaper la Repubblica
reported.

Borrowing Costs

Europe’s inability to contain a regional debt crisis that
started in Greece more than two years ago led to a surge in
Italian borrowing costs as investors bet on which nation may
need aid next. Monti, an economist and former adviser to Goldman
Sachs Group Inc., will try to reassure investors that Italy can
cut a 1.9 trillion-euro ($2.6 trillion) debt and spur economic
growth that has lagged behind the euro-region average for more
than a decade.

As support for a Monti government built last week, 10-year
bond yields narrowed more than 100 basis points from the euro-
era record of 7.48 percent on Nov. 9 and the yield difference
with German bund fell to six-day low of 446 basis points. The
rally was short-lived, with the spread returning to 531 basis
points at 1:10 p.m. in Rome.

Government Unraveled

President Giorgio Napolitano offered Monti the post of
premier on Nov. 13, a day after Berlusconi resigned.
Berlusconi’s government had unraveled after defections ended his
parliamentary majority and the country’s 10-year bond yield
surged to euro-era records.

Senate Deputy Speaker Emma Bonino, a member of the Radical
Party, told reporters in Rome that “the situation is so serious
it requires a direct involvement of politicians.”

Monti experienced his first market test yesterday when the
Treasury sold 3 billion euros of five-year bonds, the top target
for the auction, at the highest yield since 1997. Italy paid
6.29 percent, up from 5.32 percent at the last sale on Oct. 13.
Italy faces 200 billion euros in maturing bonds next year.

“The economic and fiscal challenges facing Mr. Monti are
daunting” as a country “expected to generate no growth next
year is being asked to undertake one of the sharpest two-year
fiscal adjustments in the euro zone,” Nicholas Spiro, managing
director of Spiro Sovereign Strategy in London, said in an e-
mail. “Politically speaking, things could get very rough for
Mr. Monti’s government.”

ECB Backstop

The European Central Bank has been buying Italian debt
since Aug. 8 after the nation unveiled 45.5 billion euros in
austerity measures, though the effort hasn’t been sufficient to
stem borrowing costs. The ECB said yesterday it bought almost
half as many bonds last week as in the previous week, with
German council member Jens Weidmann saying that the “co-option
of monetary policy for fiscal needs must come to an end.”

The EU has signaled it wants additional action by Italy to
spur growth and trim debt as well as hasten implementation of
the measures it’s already passed, which include raising the
retirement age, opening up closed professions and selling real-
estate assets. EU and ECB inspectors arrived in Italy last week
to review progress and Berlusconi also agreed to International
Monetary Fund monitoring of Italian finances.

EU Commitments

“An attempt to restrict the government to implementing the
economic commitments promised to the EU and IMF, or placing a
strict time limit on its duration in office, would curtail any
possibility of a strong government,” Eoin Ryan, an analyst at
IHS Global Insight in London, said in an e-mailed note. “The
markets are expecting a bigger response than this.”

Berlusconi was the fourth leader of a southern EU nation to
be brought down by fallout from the debt crisis, after Greek
Prime Minister George Papandreou resigned last week, Spanish
Prime Minister Jose Luis Rodriguez Zapatero decided not to seek
re-election this month and Portuguese Premier Jose Socrates
stepped down in March after parliament nixed his austerity plan.

Monti has said he’ll focus on fixing public finances and
boosting economic growth. Both houses of parliament must hold
confidence votes to confirm the new government, which should be
in place before Nov. 18, Chamber Speaker Gianfranco Fini said
yesterday.